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I’ve struggled to make sense of the public market trading for software companies beyond just the Fed’s money printer go brrrrrr.
So I‘ve been spending time with a bunch of smart people trying to get a perspective. A thread... (1/)
So I‘ve been spending time with a bunch of smart people trying to get a perspective. A thread... (1/)
I hoped to hear something groundbreaking that caused an aha moment for me on why we have ~14 companies trading at over 25x NTM revenue. I certainly didn’t get that but 4 things fairly consistently came up (2/)
1) Interest rates are so low that there aren’t a ton of places to get yield. So money is staying in the public markets despite all the volatility and uncertainty. Long term growth assets benefit most from low interest rates due to WACC calcs (3/)
2) Software is one of the only durable places to park money in the public markets. They’re inherently digital and operations simply aren’t impacted anywhere near as much as other industries (4/)
3) Customers are still renewing sw contracts. The end customers of sw companies might be impacted by the environment but they’re not acting too differently. We can debate why this is the case (are customers picking layoffs over churning sw contracts?) but it’s happening (5/)
This is the first time we’ve ever gone through a recession with dozens of recurring revenue public sw companies that we can analyze and these business are largely proving very resilient. These services seem to be mostly core infrastructure for operations (6/)
4) Digital transformation is accelerating because digital has been the only type of business that a lot of customers have. There have been a few sw companies that directly benefited from wfh but a lot of others benefited from repriortizations and behavior changes (like ecom) (7/)
With reprioritzaitons, inertia was largely shattered and people moved decisively to keep their businesses going. Instead of kicking the can, a lot of customers plowed ahead and made buying decisions for new software solutions that were key to their future (8/)
So those were the main four themes that emerged from the conversations. Again nothing particularly groundbreaking but at least the inputs for “why?” were more than just money printer go brrrrr (end)
